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Markets up on short-selling ban

Fri, Aug 12, 2011, 01:00

European financial stocks opened weaker today after the introduction of a ban on short-selling by four countries, but rebounded in later trading.

France, Italy, Spain and Belgium imposed the ban, which will vary in detail depending on the country, the European Securities and Markets Authority (EMSA) said in a statement late last night.

Separately, Germany is to push for a European ban on naked short-selling of stocks, government bonds and credit default swaps, a finance ministry spokesman confirmed.

"We are advocating a wide-reaching ban on naked short-selling of stocks, sovereign bonds, and credit default swaps," spokesman Martin Kotthaus said. "Only this way can destructive speculation be countered convincingly."

French banks, at the centre of attention and included in the ban on short-selling, were up: Societe Generale rose 5.3 per cent, BNP Paribas added 6 per cent and Credit Agricole gained 3.5 per cent.

A gauge of European banks increased 4.3 per cent, for its second day of gains, as Dexia SA surged 17 per cent and Barclays soared 5.3 per cent.

The Stoxx 600 jumped 3.5 per cent to 237.2 at the close in London as 30 stocks rose for every one that fell. The benchmark measure dropped 0.7 per cent this week. The gauge has decreased 19 per cent from its high this year in February.

National benchmark indexes advanced in every western European market. France's CAC 40 rose 3.8 per cent, the FTSE 100

gained 3 per cent and Germany's DAX climbed 3.2 per cent. The Iseq was up 2.5 per cent at close.

After one of the most volatile weeks in memory, US stocks ended higher today in a tentative sign that the worst of the selling may be over.

Volume was much lighter than on any other day of the week and intraday swings were far less violent than those seen in previous days. Both signs suggested a drop in investor anxiety.

The Dow Jones industrial average was up 107.74 points, or 0.97 per cent, at 11,251.05, according to the latest available figures.

The Standard & Poor's 500 Index was up 4.43 points, or 0.38 per cent, at 1,177.07. The Nasdaq Composite Index was up 13.36 points, or 0.54 per cent, at 2,506.04.

For the week, the Dow was off 1.5 per cent, the S&P fell 1.7 per cent and the Nasdaq dropped 1 per cent.

Earlier today, Tokyo stocks dipped further below the 9,000 line, extending hefty losses sustained during the most volatile week since the March 11th earthquake.

The Nikkei lost 0.2 per cent to end at 8,963.72, while the broader Topix fell 0.4 per cent to 768.19.

European markets have repeatedly moved on rumours about the health and funding needs of indebted euro zone governments, and more recently on some of its major banks.

"It's one of those things that politicians grasp for when they have no other tools left in their arsenal," said James Angel, an associate professor specialising in financial market regulation at Georgetown University's McDonough School of Business in Washington DC.

"All it really does is kick sand in the ears of the market and signals to the world that the leaders are clueless as to what's going on."

European regulators had previously played down the idea of a blanket ban on short-selling, through which an investor borrows shares and sells them on the expectation their price will fall and they can be bought back at a lower price.

EMSA said short-selling combined with rumour-mongering created a strategy that was "clearly abusive."

"Today some authorities have decided to impose or extend existing short-selling bans in their respective countries," it said. "They have done so either to restrict the benefits that can be achieved from spreading false rumours or to achieve a regulatory level playing field."

France will ban short selling on 11 financial stocks for 15 days, Spain will protect 16 stocks for 15 days, while Belgium will ban short selling of four financial stocks for an indefinite period. Details of the Italian ban were not immediately clear.

Banks on the list included France's BNP Paribas and Societe Generale , and Spain's Santander and BBVA .

The European assault mirrors one by the US Securities and Exchange Commission on September 19th, 2008, four days after Lehman Brothers collapsed, to temporarily ban short selling in 799 banks and other financial institutions.

The UK imposed a similar prohibition at that time.

The US move was of questionable value, according to several academic studies. While share borrowing fell during the three-week ban, financial stocks continued to plummet. It also raised philosophical issues about whether regulators should interfere with the free market and the rights of investors to hedge or speculate. The move was also criticised by at least one former SEC official as a political decision.

In Asia, South Korea banned short-selling in all listed stocks on Tuesday. It already had a rule in place prohibiting the shorting of financial stocks. Hong Kong is bringing in rules forcing investors to disclose short positions above a certain threshold to the market regulator.

Some hedge fund experts said the European ban would likely limit liquidity by shutting out some market participants.

The latest market turmoil focused on speculation about French banks, which are heavily exposed to European countries at the centre of the region's debt crisis. Societe Generale, France's second biggest lender, has especially been in the eye of the storm.

Those rumours sent shock waves through credit markets, pushing interbank borrowing rates higher and triggering a three-month high of €4 billion in emergency overnight borrowing from the European Central Bank.

Investors said the latest loss of confidence was a sign that few of the problems that brought bank lending to a halt last time around have really gone away.